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Selling Your Business? Here’s What You Need to Know

Owning a business is not just about making profits, it’s also about building something that can provide you with financial security in the long term. And one way to secure your financial future is by selling your business when the time comes. However, selling a business is not as simple as putting up a “For Sale” sign and waiting for a buyer to show up. There are many factors to consider, including the capital gains tax.

Determine the Value of Your Business

The first step in preparing to sell your business is to determine its value. This will help you set a realistic asking price for potential buyers. There are several ways to value a business, including:

  • Asset-Based Valuation: This method calculates the value of the business based on its assets, including equipment, real estate, and inventory.
  • Market-Based Valuation: This method compares your business to similar businesses that have recently sold.
  • Income-Based Valuation: This method calculates the value of the business based on its potential future earnings.

It’s important to work with a professional accountant or business appraiser to determine the value of your business.

Get Your Financial Statements in Order

When you sell your business, potential buyers will want to see your financial statements to determine the profitability of the business. Make sure your financial statements are accurate and up-to-date. This includes your balance sheet, income statement, and cash flow statement.

Identify Potential Tax Liabilities

When you sell your business, you may be subject to various taxes, including capital gains tax. It’s important to work with an accountant to identify any potential tax liabilities and develop a strategy to minimise them.

Understand Capital Gains Tax

Capital gains tax is a tax on the profit you make from selling an asset. It’s the difference between the selling price and the cost of acquiring and improving the business.

The amount of capital gains tax you will pay depends on several factors, including the length of time you’ve owned the business and your tax bracket. It’s important to work with an accountant to understand how capital gains tax applies to your specific situation.

Consider Tax-Deferral Strategies

If you’re concerned about the amount of capital gains tax you’ll have to pay when you sell your business, there are tax-deferral strategies you can consider, such as a 1031 exchange or an installment sale. These strategies allow you to defer or spread out the tax liability over time.

Consult with a Professional

Preparing to sell your business and navigating capital gains tax can be complex. It’s important to work with a professional accountant who can help you understand your options and develop a strategy that meets your needs.

For example, if you sell a business worth £1 million and your original investment in the business was £500,000, you would have a capital gain of £500,000.

If you’re a UK resident and your total taxable income for the year, including the capital gain, is below the higher rate tax threshold of £50,270 for the 2022-2023 tax year, you would pay capital gains tax at a rate of 10%, resulting in a tax liability of £50,000.

If your taxable income is above the higher rate tax threshold, you would pay capital gains tax at a rate of 20%, resulting in a tax liability of £100,000.

However, there may be tax reliefs and exemptions available to help reduce your tax liability, such as Entrepreneurs’ Relief or Business Asset Disposal Relief. It’s important to work with an accountant to understand how these thresholds and rates apply to your specific situation.

Conclusion

Selling a business is a significant event that requires careful planning and consideration. By following these tips and working with a professional accountant, you can prepare for a successful sale and minimise your tax liabilities, including capital gains tax.

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